Israel-Gaza war may wipe 23% off Lebanon's GDP as conflict hits tourism

Israel’s economic growth is estimated to slow by 5 per cent in the fourth quarter to limit full-year expansion to 1.5 per cent, S&P says

Tourists take a selfie in front of the Rawcheh Sea Rock as the sun sets over the Mediterranean Sea in Beirut, Lebanon. AP

A drop in tourist arrivals to the Middle East due to the Israel-Gaza war will have a significant impact on neighbouring countries, but will deliver the biggest blow to Lebanon's already battered economy with an estimated loss in gross domestic product of up to 23 per cent, ratings firm S&P Global warned.

If tourism revenue falls 10 per cent to 30 per cent due to the war, that would cut Lebanon's GDP by 10 per cent, the agency said on Monday. In the worst-case scenario, a 70 per cent drop in tourism receipts could lead to a 23 per cent hit to the country's GDP.

Lebanon has the highest reliance on tourism among its neighbours, Israel, Egypt and Jordan. Last year, tourism contributed to 26 per cent of Lebanon's current account receipts.

“In the context of ongoing foreign currency shortages, currency depreciation of more than 95 per cent since 2020, hyperinflation, and a political vacuum, Lebanon can ill afford to forego critical foreign currency inflows from tourism,” S&P said.

Global airlines including Lufthansa, Eurowings and Swiss Air suspended flights to Lebanon in mid-October.

Lebanese security forces use water cannons as they clash with protesters outside the US embassy in Awkar. AFP

Thousands rallied to protest the deaths of hundreds of people in a strike on a Gaza hospital that they blamed on Israel, which has denied responsibility. AFP

Protesters gathered outside the US embassy in Awkar east of Beirut to express solidarity with the Palestinians in Gaza. AFP

Security forces have used water cannon and tear gas to disperse hundreds of protesters outside the US embassy. AP

Officers retaliated and sought to break up crowds in the northern suburb of Awkar. AFP

Many that took place in the protest waved Palestinian flags outside the US embassy. AFP

Demonstrators were seen covering their faces as they fled the gas, while others ran. AFP

The protest came after hundreds of demonstrators swarmed around the hilltop embassy, as news of hundreds of deaths in a Gaza hospital strike emerged. AFP

The tourism sector is a big employer and an important source of foreign currency in many Mena countries. The UN World Tourism Organisation says the region received 20 per cent more tourists in the first seven months of this year than in the same period in 2019, making it the only region where tourism has exceeded pre-pandemic levels.

This supports the countries' economic growth and current accounts, but the consequences of the war have put the progress at risk, S&P said.

“Lebanon, Egyp, and Jordan could suffer the most, hampering real GDP growth and weakening their external positions” due to their shared borders with Israel and the potential for the conflict to spill over into their borders, it said.

Last year, tourism contributed 21 per cent of Jordan's current account receipts, 12 per cent in Egypt and 3 per cent for Israel.

S&P estimated that a scenario of a 10 per cent to 30 per cent drop in Egypt's tourist revenue would cost the country 4 per cent to 11 per cent of its foreign exchange reserves if the central bank opted to intervene in the FX market.

In a scenario of a 70 per cent drop in tourism revenue, it could cut Egypt's foreign reserves by 26.6 per cent and cut 1.8 per cent of its GDP.

“It is important to emphasise the quite large share of visitors from the region and diaspora in total tourism arrivals, which should help shield the sector from a larger sector shock,” S&P said.

“Such visitors are likely to have somewhat more inelastic demand to regional geopolitical considerations.”

In Jordan, a 70 per cent drop in tourism revenue could cut its foreign exchange reserves by as much as 22.2 per cent and its GDP by 8.5 per cent.

In Israel, foreign tourism has come to a halt, but the economic impact is “likely to be minimal” because the sector makes up less than 3 per cent of current account receipts, S&P said.

If tourism income were to drop by 70 per cent, the loss would be equivalent to about 2 per cent of Israel's official foreign exchange reserves, it said.

However, the Israeli economy will likely face “more severe consequences from logistical disruptions, business interruption, a reduced labour force, suspension of gas production at the Tamar gasfield, and lower investment”, the rating agency said.

S&P expects Israel's GDP to shrink by 5 per cent year on year in the fourth quarter of 2023, bringing down growth for the full year to 1.5 per cent. It forecasts growth at 0.5 per cent for 2024.

Broader Mena region outlook

For the GCC, Turkey and Iraq, the impact on tourism flows is “unlikely to be material”, though much depends on the duration and spillover of the conflict into the broader region, S&P said.

“Within the broader Mena region, higher perceived security risks could dampen the inflow of tourists,” the agency said.

The UAE has a large and diversified tourism industry that “could be affected by cancelled hotel bookings and events to some extent. But we do not currently expect the decline to be significant, for now”, S&P said.

This is because the UAE has “some buffer” as tourist inflows already exceed pre-pandemic levels in the year-to-date and some tourists may divert their travel to the UAE from other parts of the region, it said.

In the other GCC countries, most visitors come from within the Gulf region. For Saudi Arabia and Iraq, a large part of tourism is for religious purposes and would be less susceptible to cancellations, the report said.

The war began on October 7, when Hamas operatives attacked southern Israel, killing about 1,400 people and taking more than 240 hostages.

Israel retaliated with air strikes and a total siege of the enclave, with the Palestinian death toll currently at more than 10,000.

The conflict has sent shock waves throughout the Middle East, triggering new areas of confrontation and risking an escalation that could potentially plunge the region into a broader war.

The war will have a lasting impact on Israel's economy, while economic activity in Gaza has ceased and unemployment is close to 100 per cent.